A perfect storm is brewing which could convince sceptical UK end users - as well as the channel partners that serve them - to finally embrace IT financing, according to participants in a CRN roundtable.
In contrast to their continental cousins, UK firms have traditionally been loath to look outside their own four walls to fund much-needed tech refreshes.
Mark Starkey, commercial director at systems integrator Logicalis, says expectations that the IT world would take a leaf out of the reprographics industry’s book are yet to fully materialise. “You never buy a photocopier; they’re always leased. We have never got there [in the IT industry] and I don’t really know why," Starkey says.
Ian Duffield, head of legal and compliance at Equanet, agrees: “At a retail level, the world seems very comfortable with alternative finance, but the minute you move to business-to-business, everyone gets a bit scared about it.”
Figures from GE Capital, which sponsored the roundtable, confirm the UK’s status as an IT financing laggard.
Just 29 per cent of UK SMBs questioned in the January research had a preference for external financing sources such as leasing, loans and credit lines when funding IT hardware purchases. This compared with 67 per cent in Italy, 39 per cent in Germany and 43 per cent in France.
The story is similar for software, where the preference for external financing sources stands at 28 per cent, the lowest of all seven countries studied.
Worse still, this aversion to alternative financing could be preventing UK firms from investing in IT for growth purposes, fuelling concerns that they might be left behind the innovation curve if things do not change.
According to GE Capital’s figures, just 19 per cent of UK SMBs listed investing in new types of equipment to support diversification into new product lines, or building capacity to service growth in new orders, as key motivating factors behind investment in IT hardware. This compares to 26 per cent in France and 30 per cent in Germany.
UK SMBs are set to shell out €12.8bn (£10.3bn) on IT hardware and software this year, compared with €26.7bn in Germany and €13bn in France.
Most resellers have also traditionally balked at the idea of turning to the “black art” of financing as a strategic tool to boost their order books.
This is despite evidence that average order values can rise by 30 per cent if there is a financial wrap associated. IT financing can also be used as a lever to break into new accounts, increase the profitability of a sale and make the customer stickier, proponents argue.
Although the outlook may appear grim, several factors are converging that promise to thrust IT financing onto the centre stage. Not only has the recession depleted firms’ cash reserves, but money is cheap and banks are not meeting their lending commitments to SMBs.
The finance providers have themselves increased their appeal by evolving their propositions beyond simple asset leasing. In addition, the move to cloud and subscription-based consumption models promises to make financing even more relevant in years to come.
Duffield says that, for these reasons, Equanet has recently elected to bring leasing right to the front of the sales cycle.
“It is very high profile for us now,” he says. “Every Monday morning we go through the sales review presentations and the leasing numbers are there in exactly the same way as how many laptops we sold. It comes down to the fundamental principle that we want to be our customers’ IT provider and take the pain away from them, and we see finance as a part of that.”
Duffield said the recent trend among leasing firms to accept not only hardware but also professional services, software, warranties and installation costs on the lease had made it easier for customers to tap into alternative finance. The shaky economy is also playing its part, he adds.
“People got into a habit of thinking that consumers do not have a lot of cash whereas businesses can buy what they like,” he says. “Well guess what, these days businesses are also worried about where the next pay cheque is coming from and nobody can afford to be sitting around with huge chunks of cash lying idle in the bank.”
Logicalis pushes pushes finance extensively on deals with its big vendor partners such as IBM and Cisco. Starkey adds: “The cost of money is really cheap and has been for three to four years. Historically in the UK the sentiment has been that financing is not worth it, but this is changing.”
Of course, the appeal of IT finance pivots partly on the generosity of the big finance providers’ terms. Peter Deacon, director of technology and strategy at Calyx, argues that the recession has seen some pull in their horns too far.
“Many are being risk averse and are loading the rates of interest depending on the stability of the business, which in the current climate is quite difficult as everyone is struggling to keep business on a par,” he says.
However, James Ryan (pictured, above right), marketing leader UK at GE Capital Equipment Finance, says his firm is very much in growth mode in the IT channel, pointing to a recent multimillion-dollar investment it has made in its pan-European extranet. This will allow reseller sales staff to get finance deals signed off 24 hours a day, he says.
“It is surprising that an IT sales guy can walk into a company and think that in 30 days he can get a cheque for £80,000,” says Ryan.
“Customers are crying out for that extra value and are asking [the reseller] not only to get them the asset and bring them the efficiency but also to help acquire it. There has been a lot of rumour and noise in the market, but over the past three to four years - with the crises going on - we have really focused on the easiness and ergonomics of doing finance.”
In line with this, end-user appetite for IT finance appears to be rising across Europe, according to GE’s figures.
In the UK, the proportion of end users who have a preference for external finance when purchasing hardware and software have shot up by seven and 10 per cent respectively since the last time the survey was conducted six months earlier. In Italy, the preference level for external financing sources now stands at 67 per cent, compared with 44 per cent six months earlier.
And according to research by Equanet, 41 per cent of 812 UK IT managers at mid-sized to large firms quizzed by the reseller in March saw financing options as essential to remaining competitive. This is despite 60 per cent confessing to never having used financing options when purchasing IT.
But there is another powerful undercurrent that may tip the boat further towards the port of financing over the coming years, in the shape of utility-based computing and cloud, delegates at the roundtable agree.
So far, the industry has done a poor job of offering businesses a genuine utility model where IT can be consumed as it is used, just like with electricity or water, argues Richard Archer, sales director of Redstone.
The onus is on the resellers, as well as the vendors and finance providers, to provide an answer and present finance solutions that offer more than just a linear consumption model, he says.
“We are not making it easy for them as a group,” Archer argues. “Within the IT world we tell [FDs] they must change every three years. So they look at the three-year cost of ownership and conclude that it does not matter whether it is wrapped up as £300 a month or £10,000, it is still money that will be spent over a short period of time.
"I think culturally, as an industry, we have to get our heads around how we genuinely move to a utility-based delivery of product and services to enable the customer to convince their own internal funding mechanism that this is a true utility cost, as opposed to a disguise for what is really a capital cost.”
Cloud and utility computing is a double-edged sword for the channel as it falls back on the resellers and SIs to fund the development and building of those solutions. Deacon suggests that resellers will need to push back more on finance providers to ensure the risk does not lie on their balance sheets.
“The market is swinging heavily in a number of ways and it is all pointing back to us, which is where we will need [the finance providers’] help,” he says.
Redstone's Archer agrees that resellers building cloud solutions will be taken out of their comfort zone and suggested that finance providers could play a greater role.
“When you are an SMB taking a lease finance option, the risk is pretty much with [the leasing firm]. When it starts to turn into services, we as the service provider are making the capital investment and then syndicating that out to different customers.
"All the risk then becomes our problem and it is not a problem we are used to dealing with.
Archer says this is an area where his company could get smarter about putting these business models together. "We could use [finance providers’] expertise, knowledge, systems and collection methods so we can focus on what we do best," he says.
Resellers must also push back on the vendors, most of whom have done little to ease the burden on VARs embracing utility computing, said Starkey. Archer singles out Brocade’s Network Subscription (BNS) service for praise.
“This is the only major vendor I am aware of that is offering a genuine monthly rental model. The risk lies with the vendor, not the financing company or reseller,” he says.
Resellers must also work in conjunction with finance providers and vendors to ensure that compensation models for sales staff remain attractive, according to Deacon.
“Calyx has not traditionally offered a financing option,” he adds. “We are trying to push it, but sometimes it is like leading a horse to water. You have to give the sales guys some incentive to start the process, as it is another thing they have to think of that is outside their comfort zone.”
Jason Skidmore (pictured, left), IT sales lead at GE Capital Equipment Finance, says that GE is well positioned to assist resellers as they embrace new business models.
“What is crucial is we have partnered with some of the largest players in the likes of Dell, Apple and Fujitsu,” he says. “Over the past 15 years, the market has moved from being predominantly hardware based, driving through to services and software and we have had to adapt. We feel we understand the market and are committed to exploring what we need to do differently going forward.”
GE Capital Equipment Finance's Ryan emphasises that finance providers such as GE are there to take the strain off the VAR. Its staff can act as a virtual additional member of the VAR’s team.
“We know in a lot of cases that managing directors are not comfortable passing over accounts or giving direct debit mandate details. You can call in that extra support from the likes of us," says Ryan.
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